NEW YORK (CNNfn) - Government sources confirmed Wednesday that Justice Department lawyers have proposed splitting Microsoft Corp. as a remedy for the company's allegedly anti-competitive behavior.
The proposal was floated over the weekend at a secret meeting of officials from the U.S. government and 19 states that have sued Microsoft.
The position of the Federal government and the states was presented to Federal Mediator Richard Posner last Monday, the filing deadline. Posner has been meeting in Chicago with state and federal prosecutors on Mondays and with the company each Tuesday.Microsoft (MSFT) spokesman Mark Murray said "I can't speculate on what the government is thinking."
He called the proposal "an extreme and radical proposal that is not justified by anything in the case and doesn't reflect the reality of the competitive industry."
The company also said, "it is ironic that anyone would be talking about breaking up Microsoft at the time America Online (AOL) and Time Warner (TWX) did the largest merger in history designed to compete with Microsoft."
The government's endorsement of a break-up, considered the "death penalty" among possible remedies, could encourage Microsoft to seek a lesser sanction during settlement talks. But it could also stymie negotiations and encourage Microsoft to battle the case through America's courts for years.
It is unclear exactly how the government envisions restructuring Microsoft. Much speculation has focused on the idea of dividing the software giant into three separate companies -- one that builds the Windows operating system, another that sells software applications and a third for Internet business. But at least one source told the Associated Press that such a thrice-cut Microsoft is not planned. Rather, according to the source, the government wants to force the creation of a series of smaller, duplicate companies -- "Baby Bills," if you will -- that would compete against each other.
Breaking up Microsoft into smaller companies would be "stupid because it just creates confusion in the marketplace," said Michael Cusumano, a professor at the Massachusetts Institute of Technology who has written about Microsoft's battle with the former Netscape Communications Corp.
"The break-up sounds like a mess to me," he said.
Microsoft shares closed down 3-9/16 at 105-13/16 on Wednesday.
In November, U.S. District Court Judge Thomas Penfield Jackson agreed with federal prosecutors in a preliminary finding that Microsoft stifled innovation in the computer industry. Prosecutors have charged the company used its dominant position in operating systems to coerce PC makers to use its software, especially its Internet browser.
A final ruling in the case is due next month.
Meanwhile, the companies have held settlement talks with a federal mediator, but both sides have declined to comment on the talks.
The disclosure that Justice favors a breakup comes on the heels of analyst firm, International Data Corp., concluding that splitting Microsoft into separate companies "would be best" for the nation's high-tech industry.
IDC called a voluntary breakup "a brilliant leapfrog maneuver that would time-warp the company into the next millennium with renewed purpose and a shining political patina."
But the firm, in a report sent to software clients and obtained by the Associated Press, also predicted that "Microsoft will choose to settle the case before it will allow itself to be broken up." --from staff and wire reports